Derivative volumes of Ether surpass Bitcoin before merger; Here’s why

The volumes of derivatives tracking ether (ETH) have grown by almost 10% in the past month and now lead the volumes of bitcoin (BTC), according to a report by Kaiko, citing data obtained from several crypto exchanges.

Of the total addressable market for ether and bitcoin futures, ether now has 57% compared to 45% on August 1st. Open interest — or the number of outstanding futures contracts — rose to more than $8.43 billion this week from less than $4 billion in July, data show. This suggests that ether prices have been pushed upwards in recent weeks due to the high use of influence.

Futures data from the past 24 hours shows ether futures crossing over $35 billion in total volume compared to $32 billion in bitcoin futures, which typically sees the highest volumes.

The interest in ether futures likely arises from traders positioning themselves ahead of Ethereum’s merger planned for later this month – a catalyst that has changed market dynamics for ether and caused price swings.

Funding rate data suggests that a significant portion of the open interest may be from short trades, or positions betting against price increases. Funding rates are periodic payments made by traders based on the difference between prices in the futures and spot markets.

Depending on their open positions, traders will either pay or receive funding, and the payments ensure that there are always participants on both sides of the trade.

According to Kaiko analyst Conor Ryder, such short trades are growing in popularity as investors either bet on a failed or delayed transition to proof of stake, or hedge their long spot ether positions ahead of The Merge. The latter reason is increasingly becoming a favored bet among investors, Ryder said, as some anticipate the possibility of an Ethereum fork and an eventual airdrop of a new ETHPOW token.

“One strategy that has also made the rounds involving short ETH futures has been to go long ETH, short futures and leave yourself eligible for any ETHPOW airdrop,” Ryder wrote. “Think of this as a dividend strategy, eliminating any price risk by going long spot, short futures, but collecting a potential dividend in ETHPOW.”

Futures markets for ETHPOW have pegged the prices of the potential token at $18, or just 1.5% of the ether’s current value, as reported.

The merger shifts Ethereum from a proof-of-work mechanism to a proof-of-stake design, after which the network will rely on “stakers” to process transactions instead of miners. This would theoretically increase network speed and security, while significantly reducing the power requirements needed to run the current Ethereum blockchain.

The event is also expected to reduce the rate at which ether is issued – especially in the months immediately following the switch. As issuance slows, the blockchain’s token burning mechanism will continue to remove ether from circulation at the same rate as before the merge.

Over time, this can reduce ether’s total market supply and eventually lead to an increase in prices with increasing demand. However, some traders remain skeptical about the price performance of ether in the medium term.

Ether is trading at just under $1,600 at the time of writing and has risen 3% in the past 24 hours, data shows.